Ireland’s National Pension Reserve Fund has radically transformed since it was first established to fund public worker pension liabilities.

Source: Photocall Ireland

It has been used to bail out the banking system and will soon change its name as part of a reorientation to support Ireland’s domestic economy with private equity and direct investments.

The NPRF, a so-called mini sovereign wealth fund managed by Ireland’s National Treasury Management Agency, was first set up by the Irish government in 2001 to deal with the prospect of an ageing population.

Charlie McCreevy, Ireland’s minister for finance at the time, estimated that Ireland’s social welfare and public service pensions costs would rocket from 4.7% of gross domestic product to 12.4% by 2050.

Funded by an annual government contribution equivalent to 1% of Ireland’s gross national product, the NPRF increased to €21.1 billion by the end of 2007. However, following the financial crisis, the fund was used to support the collapsed Irish banking system.

Between 2009 and 2011, the NPRF spent about €17 billion providing loans and equity investments in the bailout of failed Irish banks Allied Irish Bank and Bank of Ireland.

A strategic fund

Today, the fund has a new purpose and will take on a new name. The Ireland Strategic Investment Fund, as set out by the Irish government a year ago, will be refocused to make investments “to support economic activity and employment”. It has earmarked the fund’s remaining discretionary portfolio, which now stands at €6.8 billion, for this programme.

“ISIF is an important element in the government’s strategy to promote economic growth and create jobs,” a spokeswoman from Ireland’s department of finance said in a statement.

The change in strategy has had a significant impact on the make-up of the fund’s discretionary portfolio of assets, which excludes its directed investments in banks. In particular, it has increased its allocation to alternative investments. At the end of 2004, the NPRF had 76.1% of its assets allocated to equities and a further 13% allocated to bonds, with no discernible alternative assets allocation.

Private equity also rose in prominence to 10.9% in the third quarter of 2013, although it later fell to 1.8% following the decision to take a purely Irish focus. The fund in the past year liquidated most holdings in private equity funds outside Ireland, including the sale of interests in 24 private equity funds for €800 million to Lexington Partners.

Jerry Moriarty, chief executive and director of policy at the Irish Association of Pension Funds, said that the reorientation of the pension reserve fund was a positive for the country “assuming that the investment supports the economy, creates jobs and provides a return”.

He added that some of the NPRF’s projects could provide opportunities for Irish pension funds to invest alongside them.

But there are potential pitfalls. “What [the NPRF] are doing exposes them to a lot of macro risk,” one northern Europe-focused fund manager said. “By doing that, they are not diversifying their risk.”
Attracting foreign capital

The fund has been doing well in attracting foreign capital to Ireland.

In January, the NPRF set up a $100 million joint venture with the China Investment Corporation, called the China Ireland Technology Growth Capital Fund, which is aimed at investing in Irish and Chinese technology companies that have strategic interests or presences in the respective countries.

Two years ago, it also committed to investing in technology-focused funds managed by SVB Capital, the US-based private equity and venture capital firm. The partnership involves SVB’s parent Silicon Valley Bank lending $100 million and providing on-the-ground support to Irish private equity, venture capital, technology, life science and cleantech businesses until 2017.

The NPRF has also invested money in larger private equity and credit funds, such as a joint venture between US buyout giant Carlyle Group and alternative investment manager Cardinal Capital Group. It committed €200 million to BlueBay Asset Management’s €450 million BlueBay Ireland Corporate Credit fund and it committed about half of turnaround firm Better Capital’s €100 million BECAP12 fund, which makes investments in underperforming businesses on the brink of insolvency.

Jon Moulton, founder of Better Capital, is positive about the NPRF’s strategic switch: “If [they] can help the economy, and get a good investment return, then the NPRF will be doing a great job.”

But the Irish Association of Pension Funds is disappointed that the original purpose of the fund to deal with an ageing population has been sidelined. Moriarty said: “The long-term plan for the fund seems to have disappeared. We’re hoping that comes into focus.

“It’s concerning that there has not been much conversation about how we are going to deal with that issue. It’s understandable that [the government] needed to [bail out the banks] during the crisis, but they also need to consider the long term.”